Speakers on the Brexit

Londoner 1 to me this morning: “It feels like we’ve gone to war and the whole world has gone mad.”
Londoner 2 to me this morning: “There are too many stupid people here, that’s why we had to have Brexit.”
The British capital is in shock today. Even people who voted Leave seem rather stunned by what’s happened.

It is also a country deeply, bitterly divided and it is hard, so soon after this seismic result, to see how it can easily be unified.

Half the population is giddy, half despairing. This is not just a divorce between Britain and the EU, it feels just as much like a divorce between one Britain and another.

I was last in the UK in March, and this week I’ve been really struck by how much the national discourse has changed since then. The mood – on both sides – is angrier, more divided and positions are more entrenched. Did the referendum campaign create this, or just enable it?

Either way, this vote has revealed a deeper truth about the time we live in because it was a referendum, as much as anything, on globalisation itself.

Globalisation, with inexorable speed, has changed the world we live in. For all of us. Jobs have changed, the way we trade has changed, who we employ has changed and the feel of where we live has changed.
And the world has become more unequal too. In retrospect, it was perhaps inevitable that that process wasn’t going to go ahead unchecked, ad infinitum.

But politicians, in Europe and the US, failed to grapple with the real life implications of this force and on Thursday a majority of Brits said “enough.”

They were fed up with politicians who didn’t listen to their concerns. It’s no coincidence that London, which has benefited massively from the globalised financial system, voted just as massively to remain.
The question for Brits now is where does this take us? The markets plunged but that could be a temporary blip.

There are plenty who believe that Britain pays too much into the EU and gets too little back and that the UK will be better off when it is unshackled from the weight of the troubled EU economies.
There are just as many economists who say Britain will be worse off alone. The truth is we don’t really know how protest votes pan out.

The global implications will be fascinating. This British referendum on the EU was, if you like, the test case for this new era of populist protest. It’s the first big national vote we’ve had in this mood. The next will be America in November.

On Friday Donald Trump congratulated Brits on taking back their country. He drew the parallels with his own campaign and made the point that people are angry, in a lot of places.

So, are enough of them angry enough to kick established politicians out in America too?

Who knew the Brits would willy-­nilly want to help the European Union (EU) solve its own dilemma? The simple fact is that the E U needed Britain far more than the Brits needed the EU. With its ‘Brexit’ vote to leave the EU, the U K may well be the ‘disruptor’ that Europe needs to finally take serious actions to rekindle sustained growth.

Sooner or later the population of an EU member would reach a tipping point and vote with their feet about the failings of Europe’s increasingly hodgepodge single market political economy ‘experiment’. Indeed, it really should be little surprise that a centralized governance regime comprised of 28 separate countries, many of whom, especially the more recent ascendants, have greater fundamental differences among them than they have in common, would prove to be unstable.

What is surprising is that it took so long. And even more of a surprise that it was such a big fish like the UK- currently the fifth largest economy in the world-that would do so. Fretting over the exit of Greece- currently the forty-seventh largest economy-now looks like child’s play.

What started in 1957 as a group of just 6 countries with the aim of providing for the free movement of people, goods, services, and capital; common policies on international trade; and uniform policies toward regional development and related matters, 60 years later has become an entity in which 24 languages are officially recognized and overseen by a bloated bureaucracy headquartered in Brussels that at the member state level is widely perceived- whether accurate or not-as operating anonymously with more than a touch of arrogance.

It is hardly a secret that the polling data-such as they increasingly are virtually anywhere in the world where there is unfettered voting-made the outcome of the Brexit referendum on June 23 notoriously difficult to predict. Indeed, the win, while decisive, was not by a landslide margin. Still, most observers did not anticipate what transpired.

In retrospect it is clear why: there was insufficient attention paid to a classic difference in the tactics pursued by each camp.

The supporters for leaving the EU-the ‘leavers’-had a fundamental advantage. They were effective in crystalizing a perceived upside, namely regulating immigration to enhance the island’s national and economic security and regaining local control of the UK economy.

The ‘remainers’ fell flat-footed in not only an inability to formulate concisely a tangible reason for voting their way, but also in articulating an affirmative case for why staying in the EU would be beneficial for the UK. Instead their campaign focused abstractly on what would be the costs to the UK if it were to pull out of the EU. Scaring voters-especially if done vaguely without showing impacts at the personal level- is rarely an effective campaign approach no matter what issue is on the table.

So what’s in the offing now?

For starters, a lengthy period of economic-and political-uncertainty . In the near term all eyes will be on who Britain chooses in October 2016 to succeed David Cameron as Prime Minister, who resigned immediately in the wake of the vote tally. That will provide little solace.

Axiomatically there is nothing that investors, businesses and markets dislike more than the absence of a clear policy roadmap-let alone one where the destination is unknown . One only need to look at the severe reaction in currency and stock markets around the world literally minutes after the release of the vote count.

But markets always overreact-especially in the short-run. The reality is that the parties have a two-year window in which to negotiate the terms of the UK’s exit from the EU. While there will surely be volatility over the negotiation period, whether it proves to take the full two years or is completed more quickly, it’s in neither the UK’s or the EU’s interest-let alone that of the rest of the world’s economic leaders-to act in such a way to further muddy the waters.

Yes, we are in uncharted territory and a tightening of the seat belt would be a good idea. But look for overtures by the EU to make nice with the UK. If the Brits are smart they’ll realize they’re the ones sitting in the
proverbial catbird seat. It would not be a surprise if what emerges is some form of a new stand-alone free-trade agreement between the two, that is, a UK-EU FTA, and a variant of a bilateral investment treaty (BIT).

Second, apart from the direct effects on economic growth from elevated uncertainty, it is widely believed that Brexit will engender further downward pressure on global economic prospects . Itis true that as the value of the Euro and the Pound change-perhaps a marked decline in the short-run-other currencies, most notably the US Dollar and the Yen, will likely appreciate. All other things equal this will make US and Japanese exports more expensive, thus having a potential dampening effect on those countries’ economic growth.

Because oil is globally priced in US Dollars, there also could be deleterious economic effects on oil importing nations, especially in emerging markets like China and those on the African continent; conversely, Russia and OPEC members could gain.

At the same time, however, a weaker Euro and Pound make the purchase of EU and UK assets from companies to real estate-more attractive to foreign investors, not only from the US and other advanced economies but also China and India. For the EU and the UK this will be a source of growth, but predictably also a time for angst.

Finally, Brexit doubtlessly will usher in a period of ferment among the remaining EU member states about the benefits and costs of the EU as currently structured and governed. In time years not months-the result may well be a trimmed down (and possibly a more homogeneous) EU.

To this end, in the aftermath of the UK vote, attention has gravitated toward Sweden and the prospects for a “Swexit”. It will likely also turn to Greece (“Grexit”). But the two have significant differences.

Like the Brits, the Swedes were prescient about joining the EU from the get-go. Both did not opt in for additional membership in the Eurozone, a subset of 19 of today’s EU member states who surrendered their local currency to be able to use the Euro; that is, to not only be a participant in a single market structure but also in a single currency union.

The Greeks, however, became a member of the Eurozone, where fiscal policy is still made at the national-level but monetary policy is the province solely of the European Central Bank in Frankfurt. This permutation of
macroeconomic management has, not surprisingly, proven to be an untenable policy straightjacket among the strikingly heterogeneous group of countries that are in the Eurozone. It’s like boxing with one hand tied behind your back and has been a far more dubious governance regime than the EU ever was.

To be sure, while a Swexit will not be trivial matter-but as the 23rd largest economy it would be nothing like Brexit-unwinding Greece from the additional Eurozone layer will be messier. Still, there’s a good chance that Brexit will embolden Greece to finally bite the bullet­ something Athens has been too fearful of doing even though it is in its best interest.

Ironically, to date Brussels’ statements following the Brexit vote are likely to actually hasten such changes. Rather than adopt a contemplative, supportive approach with respect to the remaining 27 EU countries, instead pronouncements have been issued by the bureaucracy warning member states to not even think about following the UK’s example or risk being penalized.

This Mafia-­like tactic will, if anything, backfire for Brussels. And, who knows, maybe the remaining EU members will end up offering thanks to the Brits for taking action in the first place.

Imagine what’s going through the mind of every developed country’s leader. Virtually all of them had endorsed the losing Remain side in the Brexit referendum, and now they’re wondering, What if that referendum’s equivalent had been held in my country? Nationalistic, anti-immigrant, isolationist movements are rising in France, Austria, Poland, Denmark, and elsewhere in the developed world. While those movements are usually described as right-wing, the Leave supporters also included a left-wing faction of older trade unionists and younger socialists, and every developed country has plenty of those too.

Collectively they’re people who believe they got the bad end of the deal in the opening of the world to freer trade, migration, and acceptance of unfamiliar cultural values. The big news from Britain is that those people are a majority there, and now leaders around the world are wondering if they’re a majority in his or her country. If Hillary Clinton wins in November, she’ll face a similar issue: Trump and Sanders supporters, though opposed to one another, are united in their fury over how today’s economic and cultural order has treated them, and together they may constitute a majority of the electorate.

The Leavers in Britain have had the satisfaction of giving established authority a poke in the eye, but now they’ll have to face the consequences of doing what was worst for them. Britain and the Leavers will likely be less prosperous than they would have been in the EU. Despite the drama of the vote, very little has been resolved.

The No. 1 agenda item at the next G20 meeting, in September, seems clear.

The scorching pace of change is such a common theme in business that as a concept it puts me to sleep. But an example can make it interesting, and a bit of news yesterday suggested a good one. BlackBerry reported earnings and said handset sales were down again; its global market share in smartphones is less than 1%. In this political season the news recalls memories of when Barack Obama became president in 2009 and demanded that federal techies figure out how to get him a secure BlackBerry phone, which he felt he couldn’t live without.

Think back a bit further. In the mid-1990s Motorola ruled the world of cellphones; now a Chinese company, Lenovo, owns the brand, and Lenovo and Motorola phones combined have about 6% of the market. After Motorola, Nokia was king; it has since left the business. Then BlackBerry phones became so addictive they were called Crackberry; now Wall Street analysts say they wouldn’t be surprised if the company shut down its phone business and focused on software. Today Samsung and Apple dominate the industry; analysts estimate that last year the two of them made 105% of total smartphone industry profits and that Apple alone made 91%.

That’s five leaders in this $400-billion industry in less than 20 years. We sometimes forget that Apple entered the business only nine years ago; next Wednesday is the anniversary. Business didn’t used to work like this. Everybody now repeats platitudes about the pace of change, but extremely few are able to internalize this reality and keep winning in the new environment.